Is the Vanguard Dividend Appreciation ETF a Buy Now?

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Should we consider increasing our investment in stocks that pay dividends? The market appears to be hesitant about this move. Despite a relatively strong performance since the 2022 bear market ended in October of that year, the Vanguard Dividend Appreciation ETF (VIG) has lagged significantly behind the S&P 500 (SNPINDEX: ^GSPC) over this period. This comparison includes any dividends reinvested during this time as well.

Given the recent shift in the global economy and the market’s dynamics, are dividend-centric funds such as VIG becoming a more attractive investment option?

Actually, they have. Here’s the deal.

Time for change

Over the past couple of years, it hasn’t come as a shock to see that dividend-paying stocks haven’t kept pace with the overall market. Instead, growth-oriented tech companies, particularly those involved in artificial intelligence, have garnered investors’ attention – and rightfully so, despite their often overvalued status relative to traditional dividend and value stocks.

Additionally, interest rates have climbed upwards since then, which has had a domino effect on dividend yields by causing the prices of dividend stocks to decrease. Consequently, this environment hasn’t been particularly favorable for these types of investments.

Just as an age-old saying reminds us, everything has its time and change is inevitable, appearing much like the wind of recurring cycles.

According to David Sekera’s analysis at Morningstar, the current disparity in valuation between growth and value stocks is quite extreme. In their Q3 2025 outlook report, he points out that value stocks are not only underpriced absolutely, but they also sit near some of the most undervalued levels compared to the broader market in the past 15 years. Given the increasing overvaluation of the market as a whole, Sekera suggests that investors might find value in the higher dividend yields associated with the value category.

Not only is Sekera in this favorable position, but it’s also reflected across the globe. According to a report from JPMorgan Asset Management published towards the end of last year, the global dividend outlook is stronger than it has been in a long time. This is largely due to historically low payout ratios, which indicate that global equities are on the verge of a prolonged period of dividend growth. Instead of just experiencing a typical increase in payouts, there’s expected to be structurally higher momentum, with dividends per share projected to grow at an annual rate of 7.6%, compared to the previous 20-year average of 5.6%.

In simpler terms, the situation supplying the Vanguard Dividend Appreciation ETF within the U.S. isn’t as severe as some other global markets. However, it’s still trending in a similar direction to the rest of the world.

Always good, but even better right now

In simpler terms, the Vanguard Dividend Appreciation ETF is an investment fund primarily designed to generate consistent growth in dividends over time.

According to the S&P U.S. Dividend Growers Index, this ETF holds the top-yielding American stocks that have consistently increased their dividends for at least a decade. It excludes the 25% with the highest yields because these often indicate a struggling stock. Instead, it includes 337 stocks, averaging an trailing dividend yield of approximately 1.7%.

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The yield isn’t exceptionally large, but it can still be surpassed. However, the main objective of this fund isn’t simply high yields. Primarily, the Vanguard Dividend Appreciation ETF aims to boost its dividends, and it does so quite effectively. To put things into perspective, the quarterly per-share payment in June was $0.87, which is almost double the payment from a decade ago in the same quarter. This equates to an annualized growth rate of more than 7%, significantly outperforming inflation during that period.

The irony? Great dividend payers also tend to produce solid capital gains anyway.

According to research conducted by Hartford Fund Company since 1973, stocks of companies that consistently increase their dividend payments have performed significantly better compared to non-dividend paying companies, with the former outperforming the latter by more than twice as much when taking into account reinvested dividends. Hartford’s analysts suggest that these corporations have traditionally shown robust fundamentals, well-thought-out business strategies, and a strong dedication to their shareholders.

Interestingly, much like the method used by the S&P U.S. Dividend Growers Index to pick its components, Hartford’s research indicates that stocks with exceptionally high yields and payout ratios don’t necessarily lead to the best returns. In many cases, a large cash distribution isn’t sustainable over time, which can significantly lower these stocks’ values.

Additionally, it’s noteworthy that Hartford’s researchers, similar to JPMorgan Asset Management’s analysts, are observing comparable low total return rates, given the current context of high corporate profits at an all-time high.

Still not for everyone, but…

If you’re not focused on receiving dividends, there’s no issue. Avoid purchasing this ETF. While it may provide significant cyclical gains currently, if your goal is long-term growth, it would be wiser to invest in a true growth fund instead. If you require a higher dividend yield immediately, feel free to consider other options for this ETF. VIG, on the other hand, is more of an all-encompassing income fund with moderate risk and relatively high safety (for an equity ETF).

As an enthusiast, if your long-term ambition is to secure a position that will eventually yield substantial dividends in the future, while also reinvesting any interim payments for even greater growth, this could be an excellent choice! The current prices of its stocks don’t fully capture the accelerated global dividend growth that JPMorgan predicts is on the horizon.

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2025-07-24 13:11